HFT

The nondisclosure agreements have lapsed. The Chicago to New Jersey microwave arms race has converged to a few winners. Many of the early participants must now be eying the runaway success (and the glaring shortcomings) of a certain HFT-associated bestseller, and thinking, yeah, “I could do that.”

It’s a fantastic story, after all, and it hasn’t really been told yet. It seems like there are two basic approaches. You could write a cinema-ready page-turner heavy on the skulduggery. Antennas knocked out of alignment the night before the jobs number. Unlicensed broadcasting on cognitive radio. Itinerant con men peddling futures on networks that will never exist. Or you could try to write a book with longer-term importance that draws the details within the larger context and paradoxes of the modern-day United States.

*

A colleague in the tech industry was recently recalling his first encounters with the real Flash Boys.

“It was some time in the summer of 2010 when the calls started coming in,” he said, “It came on suddenly, and then it ramped up. Fast. All through the fall and then into 2011. They’d come on site, and it was clear they weren’t your traditional telecom guys. They were a lot younger, for one. Sandals, cargo shorts, T-shirts. They flat-out refused to say what it was they were actually doing.

“They talked gain margins, modulation, propagation physics, et cetera, but in an oddly theoretical way. It was as if they’d just stayed up late mastering a textbook. Every single one of them wanted to know about regeneration latency. Up to then I’d never given any consideration to internal latencies. Normally, on the digital signal processing side, you’re interested in error correction, and doing it absolutely as well as you can. Extra microseconds had never mattered, period.

“They weren’t staying at the Super Eight. They’d limo out, keep the limo waiting all day. Once, I said to one of them, ‘Hey, let me give you a lift back to the airport.’ Turned out he wasn’t flying commercial. I dropped him off at general aviation. I saw that a G4 was waiting on the tarmac.”

*

In early 2011, I attended an event, known as a research “Jamboree” where everyone – that is, the large collection of physicists working in the building – stands up in rapid succession and gives a one-minute talk while showing pre-loaded PowerPoint slides. Having already given several of these talks, I knew that my previous modus operandi, which had consisted of earnestly trying to explain too much research, and then getting unceremoniously cut off, Gong Show style, was completely ineffective.

When my minute came up, I went up to the podium. My slide was a screenshot of a maze of numbers; an asof joined kdb+ table of equity quotes – sample data that I had been using while learning the terse Q language.

“One minute isn’t very much time,” I said, finally, breaking the silence, “but it’s an eternity in the highly secretive, highly profitable world of high-frequency trading.”

I pointed to the numbers on the slide. “This is a time series of offers to buy and sell shares of stock. What’s completely amazing is that the data structure holding these ticks has a nanosecond field. Every one of the 23,400 seconds in the trading day is now potentially divisible into a billion individual increments. Kind of staggering when you compare with the fact that Earth is 4.5 billion years old.”

“A decade ago, talking about nanosecond stamps on the trade blotter would have been absurd. In the Dot-Com boom, you had day traders flipping shares of Xilinx, and sometimes they even managed consistent profitability. The fastest human reaction times are of order one hundred and fifty million nanoseconds.”

“Speed of light is a foot per nanosecond. Einstein’s theory of special relativity is now an economic issue. A few more orders of magnitude decrease in latency, and general relativistic time dilation starts to matter. In the future, to get a competitive interest rate, you’ll need to live deep in a gravitational potential well, and you’ll need to have your bank out in flat space time.”

My minute was up. Everyone was staring at me like I’d arrived from outer space.

“Well, Uh, OK…” the moderator said, “That was something different. Our next speaker is going to tell us about the accretion of gas onto galaxies at redshift Z=2.”

*

The next day, I ran into a colleague, I’ll call him Tim, in the hallway, “Were you serious?” he asked.

“More or less,” I said, “General Relativity – gravitational time dilation – that’s for sure playing no role in the market right now, but special relativity is relevant in the sense that the distinction between timelike and spacelike events definitely matters if you are back-testing a strategy against historical data.”

I told him about the scheme to use a microwave relay to beat Spread’s Network. “Apparently, they spent of order $300M to trench the fiber. Wireless could be more than two orders of magnitude less expensive…”

“I’m in,” he said.

*

Even at 1% the expense of Spread’s fiber, a clandestine wireless relay spanning a third of the continent presents a daunting project. The urgent question at the start of 2011 was whether anyone had gotten there first.

The geodesic arc from Chicago to New York never strays far from 41 N, and the FCC has made it easy to query for entities that fit specified criteria within a relevant geographic range. A first pass through the filters produced a jumble of familiar and obscure names:

AB Services LLC

airBand Communications

AT&T Corp

Cellco Partnership

Clearwise Spectrum Holdings II & III, LLC

Comprehensive Wireless, LLC

ECHOSTAR CORPORATION

FELHC, Inc.

FiberTower Network Services Corp.

FiberTower Spectrum Holdings LLC

Fundamental Broadcasting LLC

HISPANIC INFORMATION AND TELECOMMUNICATIONS NETWORK; INC.

IDT Spectrum; LLC

MCI Communications Services; Inc

METROPOLITAN AREA NETWORKS; INC.

MPX Inc.

New Cingular Wireless PCS; LLC

Norfolk Southern Railway Company

Northrop Grumman Systems Corp.

Open Range Communications

Telecom Transport Management; Inc.

TEXAS EASTERN COMMUNICATIONS INC

Thought Transmissions LLC

Towerstream Corp.

Trex Enterprises Corporation

Westwood One Radio Networks; Inc.

With the transect list in hand, it was straightforward to step through the firms and plot their antenna locations. A Chicago to New York line-of-sight-relay would presumably be obvious, even at a glance. First on the list was “AB Services”, but the FCC website had suddenly slowed to an infuriating crawl. We waited for nearly a minute. Finally a map appeared on the screen, triggering a mixture of awe and disappointment.

A quick back of the envelope calculation indicated that even with off-the-shelf radio latencies, AB Networks, as licensed in the FCC database, was easily capable of beating Spread’s fiber. Google linked the LLC to Anton Kapela and Alex Pilosov, two gentlemen who, if nothing else, appeared to have a variety of marketable tech skills. A Wiredarticle from 2008 reported on a presentation they’d given at the DefCon hacker conference:

“…BGP eavesdropping has long been a theoretical weakness, but no one is known to have publicly demonstrated it until Anton ‘Tony’ Kapela, data center and network director at 5Nines Data, and Alex Pilosov, CEO of Pilosoft, showed their technique at the recent DefCon hacker conference. The pair successfully intercepted traffic bound for the conference network and redirected it to a system they controlled in New York before routing it back to DefCon in Las Vegas…”

Stepping through the list of licensees indicated that “Comprehensive Wireless”, “Fundamental Broadcasting” and, the creepily named “Thought Transmissions” had, starting a few months after AB’s appearance in September 2010, also licensed a network, using the different LLCs to help mask their intentions. Comprehensive-Fundamental-Thought had set up a more direct route, and if operative, would be even faster than AB’s.

*

It was clear that an arms race was developing, with an end state winner destined to be a very straight network with very fast radios. To see how far along things were, we needed to look at tick data to discern how fast the information was propagating. Was anyone already up and already front-running Spread?

The Forbes article suggested that the fiber build was spurred by a trade involving “tiny discrepancies between futures contracts in Chicago and their underlying equities in New York.” Looking through the academic literature, a paper by Joel Hasbrouck, titled “Intraday Price Formation in U.S. Equity Index Markets” jumped out by virtue of having been cited hundreds of times. The abstract reads:

“The market for U.S. equity indexes presently comprises floor-traded index futures contracts, exchange-traded funds (ETFs), electronically traded, small-denomination futures contracts (E-minis), and sector ETFs that decompose the S&P 500 index into component industry portfolios. This paper empirically investigates price discovery in this environment. For the S&P 500 and Nasdaq-100 indexes, most of the price discovery occurs in the E-mini market. For the S&P 400 MidCap index, price discovery is shared between the regular futures contract and the ETF. The S&P 500 ETF contributes markedly to price discovery in the sector ETFs, but there are only minor effects in the reverse direction.”

So it appeared that we were in familiar territory! We were effectively faced with a particle physics experiment, which was soon diagrammed on a whiteboard:

E-mini trades in Chicago propagate more than a thousand kilometers, at a substantial fraction of the speed of light, before slamming into data center “detectors” in suburban New Jersey. We could measure the latency by correlating the SPY order book response to E-mini price-changing trades. After obtaining data, sorting out FIX and ITCH, and building the order book — hassles all – we could see how fast trading was occurring.

To get a baseline, we first sifted data from the period around the end of April 2010 leading up to the Flash Crash. Those were among the now long-gone glory days of HFT. Huge volumes, huge volatility, and no sign whatsoever of anyone trading at a rate that could beat Spread, whose construction crews were racing to bore the tunnels for their fiber through the resistant Precambrian basement of the crystalline Appalachians.

Walking home that night, a Vampire Weekend song that rotated randomly into my earbuds seemed somehow apropos:

The pin-striped men of morning
Coming forward to dance
Forty million dollars
The kids don’t stand a chance

Rumors have been circulating for a while. In five minutes, at 14:00:00:00:000 exactly, these rumors will be confirmed by an official press release: McKay Brothers, the well know international low-latency provider for high-frequency trading firms, receives investment from Dutch market-making firm International Marketmakers Combination, aka IMC. One of the McKay’s mottos, “Not affiliated with any trading firm or exchange”, will have to be removed.

The press releases will state:

Under the terms of the agreement IMC will take a minority stake in McKay, providing capital for the further improvement of McKay’s networks serving the latency sensitive trading community. Financial terms of the agreement were not disclosed.

Key elements are:

• IMC makes a capital investment and acquires an equity stake • McKay maintains its independence under co-founders Stéphane Tyč and Bob Meade • McKay commits further investment to reduce latency to the physical limit in its key long haul routes • McKay continues to operate under its core business principles which include offering a level playing field and equal access to the lowest latency service for subscribers

The terms of the agreement are not disclosed and no details are provided but it seems that IMC purchased less than 30% of both McKay Brothers and their parent company Quincy Data. “That’s great news for all of the trading firms that use our networks and for the industry as a whole”, says McKay CEO Stéphane Tyč, while the Global Head of Technology at IMC, Arno de Quaasteniet, states that “as a strong, independent supplier, McKay plays a crucial role in ensuring equal and fair market access to liquidity providers. These are principles IMC shares”.

This is an interesting move. First, we may assume that IMC has been (and still is) a client of McKay Brothers. As far as I know IMC is the only Amsterdam-based trading firm that did not build a proprietary microwave network (at least in Europe), unlike Optiver and Flow Traders, the two other Dutch HFT/market-making companies. Secondly, one may ask: why McKay Brothers needed investment from a HFT firm? And why IMC? It seems like various HFT firms offered to buy McKay Brothers but the company declined. On the other hand, we may assume that the firm needed investments to improve their networks (i.e. “reducing latency to the physical limit”). Even if it’s said that McKay has the fastest network between Chicago and New Jersey, speed race is an endless war. In June 2016, Stéphane Tyč explained in Chicago that route improvements are critical to save a few microseconds, as shown in the picture below – it took four years to achieve the “route improvement” in red:

Average latencies between Chicago (CME) and New Jersey (Secaucus and Mahwah)

I don’t know how much McKay paid for the tower they acquired to save 17 microseconds between Chicago and Mahwah (the “route improvement”). That’s probably less than the €5,000,000 Jump Trading spent to purchase a tower in Houtem (Belgium), and less than what Vigilant and/or New Line Networks will spend in Richborough (if they can build these controversial very high towers). But everything is expensive and the cash flow of IMC will probably help McKay/Quincy. According to Amterdamtrader, the net profit of IMC was €185 million in 2015 (€20 million more than 2014). With all that money McKay will have the resources to acquire other towers – if needed. (If McKay builds a London-Stockholm route that would be amazing to have dishes put on old windmills.)

Now I bet McKay will have to tell the customers of their networks that they will never give IMC a speed advantage. “IMC will have no access to client information and no latency advantage”, Stéphane says.

So, one of the biggest market makers in the world (active in over 100 exchanges and employing 600 people) has stakes in one of the best low-latency networks provider in the world. It seems that the (young) HFT microwave industry is changing these days. For years you had private networks (built by proprietary firms like Vigilant/DRW, Jump, etc.) on one hand, and networks providers (McKay, Custom Connect, Perseus, etc.) on the other hands. In 2015, trading firms Jump Trading and KCG created a joint venture, New Line Networks, to “sell network bandwidth to industry participants and third party vendors”, meaning that they now compete with McKay and the other providers. Earlier this week Bloomberg reported that at least three rival trading firms (Citadel, Jump and Virtu) “are in talks to jointly build a Chicago-to-Japan communications link”, including a microwave route between Chicago and the U.S. west coast – a project dubbed “Go West”. Competition in the very low-latency area is no longer a war between proprietary trading firms and networks providers – it’s a little bit more complex now. Anyway, good luck to the brothers. Accidentally I’ll be in Amsterdam tomorrow; I’ll meet several people involved in the HFT industry and I guess what we are going to talk.

The Harvard University Campus from which the McKay, Quincy and Jefferson names come. Jefferson Microwave LLC was the first network McKay International built in the US in 2012.

On November 3, 2014, I released the fourth episode of HFT in my backyard. Back at that time I was still discovering the amazing world of microwave (a technology that seems to be the fastest way to carry data between different distant exchanges) and I was still trying to figure out who were the different competitors in this not-so-secret area. I quickly understood that we have two types of competitors: proprietary firms and/or marker makers like Optiver, Vigilant Global, Jump Trading, and microwave providers like McKay Brothers or Custom Connect – these providers lease their networks to proprietary firms, trading desks of banks, etc. That’s how I came across a pseudo-secret firm located in Panama named Mossack-Fonseca, which is very famous now – and it is well deserved– thanks to the Panama Papers leaks. The Mossack-Fonseca tower in Panama is the place where an off-shore tax haven meets high speed trading.

The Mossack-Fonseca tower in Panama City

In November 2014 I parsed the French radio regulator website (Agence nationale des fréquences) and I found the different firms I wanted to catch (including their legal postal addresses) but an unknown name showed up: Latent Networks. I checked the public records containing all the French radio operators and I realized the Latent postal address was in Malta – that was quite exotic for a HFT-related firm as most of the other microwave operators (McKay, Custom Connect) are incorporated in the countries where they have activities (The Netherlands, France, Swiss for instance). On the official Malta Registry of Companies I found the firm Latent Networks (incorporated in 2012), I spent a dozen of dollars to buy the “certificate of registration” and I suddenly I jumped from Malta to Panama, as the two shareholders of Latent Networks Limited are a firm named Invest Group Ltd and another firmed named Amicalle Corp., incorporated in Marbella East 54th Street 3A, in the city of Panama, the postal address of Mossack-Fonseca.

So I registered to the Registro Publico de Panama to find more data about this Amicalle Corp., and then I discovered the wonderful and amazing world of Mossack-Fonseca. According to the public data, Amicalle Corp. has two shareholders, Dubro Limited SA and Aliator SA, and different directors. Both Dubro Limitad SA and Aliator SA have the same directors (some are directors of Amicalle too), and both Dubro and Aliator have the same shareholders, Cheswick Inc. and Eastshore Inc, one director (Yenny Martinez) of both Cheswick and Eastshore being a director of Dubro, Aliator and Amicalle. At that point I started to understand the way thousands of firms can hide in Panama behind figureheads/shell companies.

The dead-end of my investigation was two names, Marta Edghill and Katia Solano, who are policyholders of both Cheswick and Eastshore. If you parse theOpenCorporateswebsite, you will learn thatKatia Solanois involved (as director, secretary, etc.) of 14,453 (!!!) different companies incorporated in Panama, whileMarta Edghillis involved in more than 8,900 companies. Thats how tax havens work – I assume that managing those thousands of firms involves quite a lot of work (amusingly, when I was watching a TV broadcast two days ago about the Panama Papers leak, the name of one of the Amicalle directors showed up on the screen). When I discovered the world of Mossack-Fonseca, I thought that if a relatively small firm like Latent Networks can be incorporated in Malta with a main shareholder in Panama, imagine the super montages big firms/banks can set up between the different tax havens in the world. Of course, all the firms linked to Amicalle Corp. (including Amicalle) have the same agent, named “BUFETE MF & CO”, and MF stands for Mossack-Fonseca.

Given the montage, in November 2014 I have not been able to find the real names behind Latent/Amicalle; I only found out that there were connections with people from Warsaw, Poland (later I discovered that the United-Kingdom radio regulator website, Ofcom, gives more details about the firms licensing frequencies, and that’s how I found some real names – but not the one I was searching for). After I released HFT in my backyard S01E04, I received a letter from Latent Networks, or more precisely, a right of reply. It must be said that my words about Latent were not really, let’s say, sweet – but this is another story, unrelated with Mossack-Fonseca –, and I thought it was fair to comply with the request and I published the Latent Networks response.

The answer starts: “The Latent Networks team had read the Sniper in Mahwah blog with interest for many weeks. The curious and somewhat eccentric activity of the author provided an interesting view, sometimes more sometimes less accurate, of the market, technology and work that we were deeply involved in.” Latent stated that “from cursory browsing Malta is behind Luxemburg, Cyprus, Holland and Ireland as a “tax heaven in European Union.” (I don’t know if the word heaven instead of haven was ironic) “It is on about the same level as Belgium, Sniper’s home country”. That’s absolutely right, Belgium is a tax haven for some people, mostly the rich French people working in finance, for the TV industry, etc., but I swear that as a French I didn’t come to Belgium to evade taxes. The Latent response confirmed that “the company structure is simple: in Amicale Inc. are the shareholders, physical persons. Latent Network Ltd. is the principal company… Keeping things sandboxed reduces risk to the customer and us. It’s just good housekeeping, not James Bond ”. Fair enough, but in my post I talked about the montages as a “novel à la John Le Carré”.

Unfortunately, if, as Latent stated, “Malta is small, administrative things get done quickly, English is the official language and it has Common Law similar to UK or US which makes international contracts easy; it is a better place than many to start a company that intends to build microwave networks in various European countries”, we sill don’t know why the parent company of Latent is incorporated in Panama. I’m not paranoid at all, but there must be a precise reason why one of the microwave providers operating in Europe needed Mossack-Fonseca at some point (since the “physical persons” Latent talk about are only figureheads, as shown in the diagram below) . The International Consortium of Investigative Journalists (ICIJ) announed that “in early May ICIJ will release the names of the more than 214,000 offshore entities incorporated by Mossack Fonseca and the people connected to them (as beneficiaries, shareholders or directors).” Perhaps Amicalle Corp. will be one of those offshore entities? Perhaps we’ll get more details? Also, it’s important to note that incorporating a firm in Panama, with the help of Mossack-Fonseca, is not illegal per se. When the Panama Papers leak was released, I recall that a month ago I was contacted by a journalist from Malta who was trying to figure out the Malta-Panama connection of Latent Networks (“I was researching two Panama cos and I found your blog; looks like your business tree for Latent could be connected to them”); the request was probably related to the Panama Papers affair.

On the contrary, other microwave operators are far more transparent. For instance, New Line Networks (aka NLN, the joint-venture between KCG’s subsidiary Geodesic Networks and Jump Trading’s subsidiary World Class Wireless) was incorporated in Belgium on January 6, 2016, according to this public document. The head office address is in Slough, UK (this is the World Class Wireless address in the UK, while the registered office address of New Line Networks LLC in the UK is in Delaware – another kind of tax haven). Why NLN was incorporated in Belgium? This might be explained by the fact NLN is trying to implant in Oostduinkerke (cf. HFT in the Banana Land, Part III). But it’s most likely that NLN did it in order to get back the licences Global Colocation Service (another subsidiary of KCG) owned in Belgium, according to this public document. For once, in a country (my backyard) where there is absolutely no public data on the radio operators, this document is gold as it reveals for the first time the towers where Jump, KCG and now New Line Networks have dishes in my backyard (hourra!) :

Since the KCG subsidiary Global Colocations is working with New Line Networks, it makes quite a lot of sense that the Global Colocation licences (in Belgium) were transferred to NLN; in the UK, according to Ofcom, the Global Colocation Services UK licences were transferred to New Line Networks LLC on May 5, 2015. But there is some irony here: guess who designed and owned the Global Colocation Services paths in Belgium before they have been sold to KCG? No idea? Latent Networks! (In the UK, the Latent licences/paths were sold to KCG in Septembre 2014, according to Ofcom) This is a so small world. Now I’m wondering why Latent is trying to arrange with Vigilant both in Richborough and Oostduinkerke, as Vigilant is a fierce competitor of New Line Networks there. But this is another story – a story forHFT in the Banana Land, Part IV.